Abstract
This paper studies a continuous-review stochastic inventory problem for a firm facing random demand and random supply disruptions. The supplier experiences operational (on) and disrupted (off) periods with exponentially distributed durations. The firm adopts an order-up-to level policy during the on period and additionally can release an emergency order based on the inventory level just before disruption. This inventory policy is described by a continuous-time Markov chain model. We analyze the model for two different lead time scenarios and suggest solution approaches yielding the optimal policy parameters. In a numerical study, we explore the value of exercising such a policy and show that an emergency ordering opportunity at the disruption time brings substantial cost savings in cases with high lost sales cost, long off period, and low percentage of supplier’s availability.
Highlights
Chains need to consider supply uncertainty during their planning phase to avoid the potential risks of incurring high operating costs and having low customer service level
We model the inventory policy under consideration as CTMC, where the state of the system is described by the inventory level and the mode of the supplier
Disruption information can be seen as an asset for inventory systems subject to supply disruptions
Summary
Chains need to consider supply uncertainty during their planning phase to avoid the potential risks of incurring high operating costs and having low customer service level. The policy provides the buyer an emergency order opportunity right before or just when the supplier gets disrupted. Our findings demonstrate that the emergency ordering option is not used unless the lost sales cost is sufficiently high It is especially efficient when there is a high chance of being disrupted for a long. We contribute to the literature of inventory models under the threat of disruptions in two dimensions: (1) We expand the analytical model of the continuous review order-up-to level inventory system with random demand and supply to a broader extent by considering zero and exponentially distributed lead times. In addition to proposing a new inventory policy to mitigate the supply discontinuity risk, we assess the value of sharing disruption information with the buyer for a continuous-review inventory system.
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